CCI’s Order Against Cartel Activities of Airline Companies

[Ayushi Singh is a B.A. LL.B. (Hons.) student at National Law University, Jodhpur]

Last month, the Competition Commission of India (“CCI”) passed an order in the matter of Express Industry Council of India vs. Jet Airways (India) Ltd. and Others upholding charges against Jet Airways, SpiceJet and IndiGo Airlines for cartelisation under the provisions of section 3(3)(a) read with section 3(1) of the Competition Act (“Act”). An order to cease and desist from impugned activities was passed along with personalised individual penalties under section 27(b) of the Act.

Facts

The Express Industry Council of India (“Informant”), a non-profit organization involved in facilitating efficiency in the express industry, filed a complaint against five domestic airlines for alleged cartelisation by fixing the price of the Fuel Surcharge (“FSC”) levied on air cargo. The complaint alleged that that the FSC was collectively introduced by the airlines on May 2008 and, since then, there has been signs of anti-competitive collusive activity.

The Director General (“DG”) investigated the claims and came to the conclusion that the actions by the airlines were not sufficient to constitute a cartel. However, the CCI on perusal of the DG report disagreed with its findings and held that the acts were collusive in nature and amounted to a cartel. A penalty of 1% of the turnover of SpiceJet, Indigo and Jet Airways was levied in 2015. No proof of collusion was found against Air India, while Go Air was also acquitted as it leased out its cargo space to third parties and had no contribution in the cargo activities.

The initial order of the CCI was subsequently set aside by the Competition Appellate Tribunal (“COMPAT”) on the grounds that the order had not been passed in accordance to rules of natural justice. The CCI was directed to reconsider the report of the Joint DG and pass an order after hearing the replies of the airlines and giving proper reasoning for their conclusions.

In accordance to this direction, the CCI perused the Joint DG’s report and received the replies and objections of the accused airlines. The three parties were again held guilty of cartelisation and fined a penalty of 3% of their average turnover received from the levy of FSC during last three financial years.

Nature of Air Cargo Industry

The relevant market, i.e. the air cargo industry, follows an oligopolistic market structure wherein the key market players are often in close and coordinated contact. Entry barriers are high, and intermediaries and information channels are actively used amongst the market players. In India, the market share of the air cargo industry is divided between the five domestic airlines, and the express cargo service providers like Blue Dart, FedEx, etc.

The evaluation of cargo tariff charged by domestic airlines is influenced by variables namely: type of cargo; weight of cargo; distance of the journey; and seasonal market changes. The airlines argued that FSC was just a trivial element of the final tariff; therefore, there was no incentive to cartelise FSC. They also pointed to the competitiveness of the overall cargo tariff to stress that no cartelisation could have taken place.

On a perusal of the DG’s report, the CCI highlighted the statistic indicating that FSC collections made up 20-30% of the airlines’ air cargo revenue. Hence, it could not have been a “trivial cost’ as stated. Additionally, it reasoned that if the overall cargo tariff was indeed competitive, priority variables like cargo rates, seasonal rates, etc would have shown signs of competition. The fact that only FSC was changed consistently by all the airlines reflects the image of collusive activity, which was too strong to merely be a coincidence. The CCI deduced such coordination to be motivated by a congruent mala fide intention to cartelise, not to compete.

Understanding FSC

The previously argued ‘trivial charge’ of FSC had been introduced with the objective of creating a buffer for fluctuating fuel prices (aviation turbine fuel, or “ATF”). The domestic airlines explained that they had been allowed to charge FSC to counteract the volatility of the ATF and this was consistently updated in tandem with long-term trends of ATF. According to their rationale, the rise of ATF led to rise in FSC, and vice versa. However, the evidence failed to highlight any such proportionality relation between the prices. Often the airlines would fix the FSC even when the ATF trends would be in flux.

Simultaneously, however, the airlines stated that FSC was also influenced by other variables like: financial conditions of the company, market feedback and dollar exchange rate. For example, they claimed that in spite of ATF trends, FSC would also be increased due to the simultaneous effects caused by rise in the dollar exchange rate.

This argument introduces three glaring contradictions: the first being the claimed objective of the FSC. If the FSC is not primarily influenced by the trends of ATF, then it cannot be claimed to be the buffer for the same. Secondly, if FSC is influenced by dollar rates, the fall in dollar rates must also lead to subsequent fall in FSC. However, the CCI found no such correlation in the records. Lastly, the CCI promptly mentioned that the final ATF prices already takes account of the dollar rate; therefore, any valuation done on the dollar rate was redundant or applied with mala fide intentions.

Even if the claimed contentions of the airlines are accepted, the CCI did not receive any documentary evidence that corroborated the calculative rationale of FSC. The airlines failed to put forth any minutes of meetings, any market accepted formula for calculating the FSC, or any other appropriate record that displayed any claimed correlation between the FSC or any other mentioned variables.

On these following grounds, the CCI came to the conclusion that the FSC was just a tool being used by the airlines to overcharge cargo tariff behind the garb of being a cushion for ATF prices. The claimed purpose had long become an afterthought in place of motivations to augment their total air cargo revenue.

Cartelisation

The airlines tried to dismantle claims of cartelisation on the ground that no direct or even indirect evidence had been presented to prove cartelisation beyond a reasonable doubt. This was promptly rejected by the CCI by a swift analysis of the definition of “agreement”. On a literal reading of the definition, it becomes clear that the meaning of agreement under the Act is widely inclusive, and not exhaustive. The implication is that even verbal, secret, cryptic agreements can be enough to facilitate the meeting of minds and counts as an agreement leading to cartelisation. The sole reason why proving cartels is difficult is due to the obscure, under-the-table nature of the transactions between parties; hence, evidence available must be weighed on the basis of preponderance of probabilities.

Towing the line of this approach, the CCI deduced the presence of cartelisation to fix the FSC on the following grounds:

1. According to the DG’s reports, the FSC rates of the three airlines were consistently changed by the exact amount in all of the analysed time-periods; sometimes on the exact same dates as well. The discrepancy in declaration dates during some time-periods were used as a defence by the airlines, but was promptly rejected. The CCI indicated that cartels need not be symmetrical in behaviour. Instead, artificial discrepancies and breaks in rhythm may be used as a gimmick to feign authenticity.

2. The airlines also contended that the parallel pricing during all the time-periods was not conclusive proof of cartelisation. They stated that this parallel pricing occurred due to the oligopolistic nature of the air cargo market wherein intermediaries are utilised to channel key information from one party to the other.

This was hardly an effective line of argumentation, as the CCI did not consider the presence of communication channels and intermediaries as positive signs for competitiveness. However, it did recognise that parallel pricing did not necessarily entail cartelisation and stressed heavily on previously discussed pieces of evidence.

Analysis

The order passed by the CCI is welcomed as a strong censure to the oligopolistic mechanism of the airlines industry. This forms a strong successor to antitrust decisions like the one where the European Commission had fined 11 air cargo carriers for fixing FSC. Due to the inelastic demand of this market, anti-competitive activities such as this causes detriment to businesses and customers. Even though this order is relevant to the cargo market, it could have ripple effects in the passenger flights market as well, such that exploitative coordinated activities to mislead passengers can be cracked down upon. For example, in 2007, British Airways had been fined £270m by US and UK authorities for fixing FSC on long passenger flights. The importance of FSC is not denied; however, it must not be used a pawn for extra revenue. In Hong Kong, the deregulation of FSC has taken place to promote competition, only after the Civil Aviation Department formulated a fixed formula of evaluation. The airlines must be transparent about the purpose of charging FSC and deliberate upon a systematic formula to fix its value.

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